AT&T's Battle for T-Mobile USA Is Political as Well as Legal

By STEVEN M. DAVIDOFF

Published: September 7, 2011

To paraphrase the Prussian military strategist Karl von Clausewitz, litigation is the continuation of politics by other means.

But as it strives to salvage its acquisition of T-Mobile USA, AT&T should not lose sight of the politics. In addition to fighting the Justice Department lawsuit that seeks to block the deal, the company must continue its public relations efforts.

Regulators need to be convinced that the public will benefit. Consumer advocates may scoff, but if AT&T plays its cards right, it stands a good a chance of completing the $39 billion deal.

While many commentators have viewed the government's suit as the endgame, it is really the beginning. AT&T is likely to adopt a two-pronged strategy, employing an army of lawyers to fight the matter in court while redoubling its political efforts aimed at bringing the government to the negotiating table in search of a settlement.

AT&T - whether in court or settlement talks - must show it is not creating an anticompetitive market. And, as in most antitrust disputes, the first issue is to define the actual market. The Federal Trade Commission, for example, failed to halt the merger of Whole Foods and Wild Oats because a lower court did not believe that premium food stores constituted a market distinct from the universe of grocery stores.

The national market for wireless services is dominated by four companies, AT&T, Verizon, Sprint Nextel and T-Mobile, and if it completes its takeover, AT&T and Verizon would control about 80 percent of that market. AT&T has tried to reframe the debate, arguing that 90 percent of Americans have a choice of five or more carriers in their local markets. The biggest of these local carriers, Leap Wireless and MetroPCS, focus on prepaid cellular users.

Yet even viewed from a local market perspective, the national service providers dominate, and that would not change after a T-Mobile takeover. And local companies, which must still provide access to national wireless networks, complain bitterly about the fees the main carriers charge for that access.

As a result, AT&T, which contends the acquisition would help it accommodate the huge demand for bandwidth created by smartphones, must show that any downside of higher concentration in local markets would be outweighed by the benefits of a deal.

The company can also argue that T-Mobile, whose growth has stagnated, is a weak player nationally, and that Deutsche Telekom, its owner, has increasingly been unwilling to make additional investments. The combined company would therefore be in a better position to compete with the two remaining national players, Verizon and Sprint.

This argument can work. Boeing used it to obtain regulatory clearance to buy McDonnell Douglas. The resulting duopoly of Airbus and Boeing remains hypercompetitive. But AT&T will have a harder time making this argument because T-Mobile is not clearly failing as McDonnell Douglas was.

Still, the Justice Department has given AT&T an advantage by bringing its suit so early. Under its agreement with T-Mobile, AT&T has until Sept. 20, 2012, to obtain antitrust approval and any other regulatory clearances. This should give AT&T ample time.

And courts have a history of rejecting government efforts to block transactions on antitrust grounds. One prominent failure involved Oracle's acquisition of PeopleSoft in 2004. In that case, the court found that simply because the market was shrinking to two competitors from three did not mean it was less competitive. AT&T might also expect to benefit from the fact that only a few years ago, the Federal Communications Commission took a local view of the wireless market in approving AT&T's acquisition of Centennial Wireless.

But in reality, AT&T is likely to have a tough time persuading the court to view the wireless market as a local one, and even if it succeeds, the combination would appear to create undue concentration in some locales.

AT&T was aware of this when it negotiated the deal, the terms of which require it to accept up to $8 billion in concessions - including the divestment of precious wireless spectrum - to win antitrust approval. And if these concessions prove insufficient and the deal fails, AT&T must pay Deutsche Telecom a breakup fee of roughly $6 billion - $3 billion in cash and the rest in the transfer of wireless spectrum.

These terms provide a powerful incentive for AT&T to bargain in earnest with the government. And AT&T has projected cost savings of $29 billion from a combination with T-Mobile, creating even more room for negotiation.

The question now is whether AT&T can bring the Justice Department to the negotiating table. At a news conference last week, Sharis A. Pozen, the acting assistant attorney general, indicated that the department had been amenable to an AT&T offer to settle the matter.

In its lawsuit, the Justice Department cited technological innovations T-Mobile had brought to the cellphone market, including the adoption of handsets based on the Android operating system. While T-Mobile does not really look terribly innovative compared with other carriers, this claim could back the government into a corner.

AT&T therefore must play a strong political game, one that is likely to involve a big public relations push to convince regulators that the deal will deliver an enhanced customer experience while improving access to wireless services. And it must demonstrate that Verizon and Sprint will provide enough competition to keep prices in check.

With almost a century of experience in dealing with regulators, AT&T's inability to gain sufficient support on Capitol Hill has been a major disappointment for the company. Expect it to redouble its efforts on the political front, particularly at a time when the Obama administration would like to portray a more business-friendly face. Gov. Rick Perry of Texas, who is seeking the Republican nomination for president, has already endorsed the merger.

Hints of what a possible settlement might look like can be found in a filing by MetroPCS, the nation's fifth-largest telecommunications provider. The company opposes the AT&T deal in its current form, but in its filing with the Federal Communications Commission, MetroPCS said that it would support a deal if AT&T agreed to divest wireless spectrum and stopped selling handsets like the iPhone on an exclusive basis.

In other words, a major competitor would accept the deal provided it also strengthens smaller competitors. This could come in the form of special deals for local carriers to access AT&T's national wireless network and sales of spectrum in local markets where AT&T would be particularly dominant.

AT&T will also continue to talk about jobs, as it did last week when it said that it would repatriate jobs at call centers if the T-Mobile acquisition were approved.

By trying to win support for the merger on several fronts, AT&T can create uncertainty about the Justice Department's chances of prevailing in court, and uncertainty increases the chances of a settlement.

Given what is at stake, do not count AT&T out.

This is a more complete version of the story than the one that appeared in print.